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America's eight largest banks would have to raise billions of dollars in additional… more

Will stricter capital requirements for big banks mean fewer loans?

That's what some banking lobbyists contend after U.S. banking regulators proposed increasing the amount of equity that eight "systemically important" banks must hold against their assets in order to be considered well-capitalized. This proposed rule, which would go into effect in 2018, would require these eight banks to raise billions of dollars in additional capital.

America's eight largest banks would have to raise billions of dollars in additional… more

U.S. regulators said the 3 percent supplementary leverage ratio agreed to by international regulators under Basel III wasn't high enough for these banks, because "capital shortfalls at these institutions can contribute to systemic distress and have material adverse economic effects." That's why they proposed increasing the leverage ratio to 5 percent for their holding companies and 6 percent for the banks themselves.

The proposal got poor reviews from lobbyists representing big banks, and kudos from community banks.

"This new proposal, combined with existing capital and leverage requirements, will make it harder for banks to lend and keep the economic recovery going,” said Tim Pawlenty, the former Minnesota governor who now heads the Financial Services Roundtable. “To increase the safety and soundness of the industry, the vast majority of banks have already made important strides to increase capital levels. This new heightened requirement would only impact U.S. institutions, resulting in American banks being put at a global competitive disadvantage. "

Frank Keating, a former Oklahoma governor who heads the American Bankers Association, sang a similar tune.

"This proposal goes beyond Basel III to impose a more difficult standard on our nation’s internationally active banks, one that would make them less competitive with their European counterparts by making U.S. loans -- including loan commitments and derivatives that hedge risk -- more expensive to offer," Keating said. "Raising capital is not without cost – it means higher funding costs for loans and that fewer loans will be made. "

Keating said the higher capital standards aren't needed.

"The Federal Reserve’s stress tests clearly demonstrated that our nation’s banks are strong enough to withstand even the most challenging economic circumstances with the capital they currently hold," he said.

The Independent Community Bankers of America, however, welcomed the proposed rule.

"This rule will target the risky financial instruments that the largest institutions keep off their balanced sheets," ICBA said in a statement. "This will offer a clean, common sense way to help offset the true level of risk that these mega-banks pose to themselves, to consumers, and to our financial system and economy as a whole. While not a panacea, this is a positive step that would go a long way towards helping to safeguard our economic system."

A bill introduced in the Senate would require mega-banks to meet a 15 percent leverage ratio. Its sponsors welcomed the regulators' proposed rule, but said their legislation is still needed to make sure banks aren't "too big to fail."

"Today's announcement is a major step forward, but it should only be the first step," said Sen. Sherrod Brown, D-Ohio. "We must do more, and this proposal will be insufficient if it is weakened by Wall Street lobbying."

"We'll continue to build support for Brown-Vitter and the complete and final end to 'too big to fail,' " said Sen. David Vitter, R-La.